Image source: Getty Images.
Continue Reading Below
Shares ofDollar Tree, Inc.(NASDAQ: DLTR)climbed 16.7% in November, according to data provided byS&P Global Market Intelligence.
The dollar-store chain received a boost from its fiscal third-quarter 2016 earnings report, released late in the month. Dollar Tree's stock had inched up during November in advance of the release, and shares gained more than 8% after the company's report was filed on Nov. 22.
Dollar Tree reported a third-quarter sales improvement of 1.8%, though this number was slightly impacted by a comparability issue. The prior-year quarter included the results of 325 Family Dollar units, which have since been divested (the company today retains roughly 8,000 Family Dollar stores that it acquired through the merger in July 2015). So the reported sales improvement could have been marginally higher, but management didn't disclose the impact of the 325 stores on overall revenue.
Same-store sales increased 1.7%, which, while not exactly a breakneck pace, nonetheless represents decent growth, given the cautiousness of traditional dollar-store customers in 2016, and renewed competition from big-box retailers, including Wal-Mart (NYSE: WMT).
In its earnings release, Dollar Tree affirmed its full-year guidance, which appeared to relieve investors. It also revealed a slight increase in gross margin of 80 basis points, to 30.4%, which can be taken as more welcome news as it provides evidence that the company isn't relying on heavy discounting to prop up revenue benchmarks.
At present, this isn't the easiest of environments for dollar-store retailers. This month, shares of competitor Dollar General (NYSE: DG) were punished after its own earnings report revealed slower growth due to deflationary pressures, and reduced SNAP (Supplemental Nutrition Assistance Program) benefits available to its customers.
Dollar Tree is slightly insulated from food deflation, as its namesake stores tend to stock less fresh produce and dairy relative to competitors, although its acquired Family Dollar Stores carry higher food inventory than flagship locations.As for the effect of SNAP benefit curtailment on customer spending habits, this hasn't yet cropped up as a performance issue cited by Dollar Tree management.
Significantly, the company appears to be successfully managing its integration with Family Dollar, which now exists as a business segment comprising about 52% of total company revenue. In September, Dollar Tree completed a post-merger debt refinancing, in which it prepaid $242 million of long-term borrowings in order to reduce future financing costs.
Though that's a small chunk of a total post-acquisition debt of nearly $7.1 billion, it reveals a commendable fiscal discipline. All in all, however, investors would be prudent to remain cautious around these shares, at least until the next couple of quarters reveal whether Dollar Tree can transcend current industry pressures.
10 stocks we like better than Dollar Tree Stores When investing geniuses David and Tom Gardner have a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, Motley Fool Stock Advisor, has tripled the market.*
David and Tom just revealed what they believe are the 10 best stocks for investors to buy right now... and Dollar Tree Stores wasn't one of them! That's right -- they think these 10 stocks are even better buys.
Click here to learn about these picks!
*Stock Advisor returns as of Nov. 7, 2016
Asit Sharma has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.